Vivendi tax deal stymies Vodafone's plans for SFR

Vodafone's hopes of acquiring SFR, the mobile phone subsidiary of Vivendi Universal, suffered a blow yesterday after the music and television group reached a 3.8bn euro (£2.5bn) tax deal with the French government.

Vivendi has been granted a new tax status which will allow it to reduce its future tax bills by offsetting profits, including those from SFR, against some 11bn euros of historic operating losses. The move increases SFR's value to Vivendi.

Though the new system operates on a group-wide basis, analysts at investment bank Dresdner Kleinwort Wasserstein note that while SFR will still pay 100% of its tax obligations, "Vivendi will be able to recoup 56% at the parent company level".

Under the previous regime Vivendi could only use the tax offset on profits from companies where it had a stake of at least 95%. Under the new consolidated global profits tax system the threshold is reduced to 50%.

Vivendi has a 56% stake in SFR, while Vodafone has the remaining 44% and is known to be interested in buying Vivendi's stake if it comes up for sale.

"The ruling makes SFR more valuable to Vivendi and increases the price of Vivendi's stake for Vodafone. This makes a deal less likely and more difficult for Vodafone to justify as additional synergies are limited."

Industry sources noted that the impact might only be short term, with other factors influencing the way Vivendi treated its tax windfall - using profits on other businesses against the tax losses, for example.

Yesterday Vivendi reiterated that its SFR stake was not for sale. A Vodafone spokesman said: "When and if Vivendi wanted to sell and we got into talks then we would have to assess the situation at that time in order to gauge the worth of the business.

"We would only pay what we considered to be a sensible price at that time."

The new tax regime will save Vivendi 500m euros this year and some 3.8bn euros over the next seven years.

However, Vivendi would have to apply to renew its tax status after five years. Vivendi made its initial application in December last year.

Vivendi has also agreed with the finance ministry that it will set up two call centres in areas of high unemployment in eastern France which will employ 300 people each. The company said yesterday that it needed to increase its call centre facilities.

It has also committed itself to spending a further 5m euros a year over the next five years to help create another 1,500 jobs, again in eastern France.

Vivendi said the jobs initiative was "in parallel" with the tax deal. Such tax arrangements were "not unusual".

"Other companies have had them. It is not as if we have been shown any favouritism," said a spokeswoman.

The deal comes amid reports that Nicolas Sarkozy, the French finance minister, is preparing to introduce tax breaks designed to discourage companies from outsourcing abroad and to reward them for bringing jobs back to France.